Renters Insurance: Why It’s Worth It

Being a renter often means having fewer things to worry about. Got a plumbing issue? Call the landlord to fix it. The refrigerator in your rented house stopped working? Call the owners and have them replace it.

But what if your apartment gets burglarized? Or, worse yet, suffers smoke damage in a fire? Some renters may think that everything they have inside their apartments is insured under the landlord’s policy, but that only covers the building itself.

Time to start worrying again.

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Many insurers offer renters insurance (a.k.a. tenants insurance or apartment insurance) that is tailored to fit the specific needs of tenants. Historically, though, renters insurance has not been nearly as popular as homeowners insurance. According to a 2012 Insurance Information Institute (III) poll, 96 percent of homeowners had homeowners insurance but only 31 percent of renters had renters insurance. It’s only natural then to call renter’s into question. Is it a scam? Are people just unaware of their options? The only way to get the right answer for yourself is to properly understand the coverage and limitations of renter’s.

It’s only natural then to call renter’s into question. Is it a scam? Are people just unaware of their options?

Before you purchase a renters policy, make sure you understand what these policies really cover and how they can protect you in unexpected ways. Also, there are some key differences compared to homeowners insurance that can help save you money in premium payments and in bigger claim payouts. (see ‘If You Don’t Have a Down Payment, Rent’)

Similarities

In all of the most important ways, renters insurance is virtually identical to homeowners insurance. Both types of insurance offer:

Liability coverage, which protects against lawsuits for bodily injury or property damage caused by you or your family members, as well as no-fault medical coverage in case a visitor is injured in your home.

Additional living expenses – including hotel bills, restaurant meals and other expenses above and beyond your daily expenses – in case your home becomes uninhabitable due to a covered hazard.

Key difference

Essentially, the only real difference with a renters insurance policy is that it strictly covers the renter’s liability and the personal property inside the apartment unit. The rest of the building – the walls, roof, fixtures, foundation, plumbing, furnaces and any appliances that are not owned by the renter – are all part of the landlord’s policy.

While many renters focus on the relative value of their possessions when choosing renters insurance, what they really should hone in on is their risk of neighbors or visitors filing lawsuits after getting injured in the renter’s apartment. Or, another person’s property may be damaged when they bring it to your home.

Essentially, the only real difference with a renters insurance policy is that it strictly covers the renter’s liability and the personal property inside the apartment unit

How it works

When a claim is filed, the adjuster inspects the damage that was done and determines the monetary value of the loss. If your claim is accepted, you can be reimbursed in two ways, depending on how your policy is structured:

Actual cash value (ACV). This method would reimburse you for your lost or damaged possessions only after accounting for the age of each item and discounting for the wear and tear, or depreciation, that has occurred over the years to lessen its value. Usually, the ACV is lower than the market value, but premiums tend to be cheaper.

Replacement cost value (RCV). This would replace your possessions with similar items at their current market value, so it does not factor in depreciation. The downside is that the annual premiums for RCV policies tend to be about 10 percent higher that ACV ones, according to the Insurance Information Institute.

The premiums for most renters insurance policies with a $50,000 property value limit are usually in the range of $100 to $300 per year, with a national average of $185 per year, says the III. This is a very affordable figure when compared to III’s reported national average of $909 per year for homeowners premiums.

Be careful, though, about setting the limits of your policy. Many renters–especially those in studios or small one-bedroom units–don’t think they have enough possessions to come near these limits. But once you start itemizing each piece of furniture, your clothing, your laptop computer, TV, DVD player, various mobile phones and other electronics, the price can add up to $50,000 faster than you think.

If you have roommates you want to add to your renters policy, it is possible, although different states and insurance carriers have their own rules on how many people can be included on one policy. It might be easier in the long run to have roommates purchase their own separate policies, especially if they prefer different insurers. And besides, do you really trust your roommate enough to put that person on your policy? (see ‘Is a Roommate Worth the Financial Benefit?’)

Tips for saving on premiums

One helpful tool for determining the value of your possessions and adjusting your coverage limits is KnowYourStuff.org, a site run by the III. This free service uses secure offsite software to make an inventory of every item in your rented home or apartment and allows you to update it easily.

Another smart way to save on premiums is to take advantage of insurer discounts for people who choose higher deductibles or bundle their renters insurance with other policies, such as car insurance. Other discounts are also offered when things like smoke detectors, burglar alarms, sprinkler systems and deadbolts are installed. Make a point of regularly notifying your insurer when such changes are made.

Deductibles for renters policies tend to start at around $500 and can go up to $1,000 or $2,000, depending on how much the renter wants to save on premiums. Of course, if you choose the high $2,000 deductible, you may save 25 percent on your premiums, but you’d be obligated to pay for anything up to $2,000 before the insurance would kick in.

In some cases, insurers will offer coverage to renters for just their property and not for liability, or vice-versa. Seek out sites that provide different quotes and side-by-side comparisons in order to find out what kind of policy can be crafted to fit your price range and coverage requirements.

Living without the protection of a renters policy may become a mistake you cannot afford to make

Why It’s Important

Renters insurance is often one of the most under-utilized insurance products on the market. Many renters don’t consider renters coverage because it has not been made mandatory by the state, as is the case for car insurance (and will be soon under Obamacare), or by lenders, who often make homeowners insurance a non-negotiable part of mortgage agreements.

But as you know by now, the costs for the premiums are relatively low, as are the barriers to entry. It only takes one burning candle to be knocked over in one unit to affect hundreds of people in an apartment complex. With so many neighboring tenants, your potential exposure to lawsuits is staggeringly high. Living without the protection of a renters policy may become a mistake you cannot afford to make.

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